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Wednesday Weakness – $1.2 Tn in Payroll Tax Cuts Aren’t Enough to Stop the Slide

What will it take?  

Yesterday the Trump Administration announced that they will be seeking the ELIMINATION of Payroll Taxes for the rest of the year.  The Government collects $1.26 TRILLION in payroll taxes so this is a $630Bn bonus for working Americans (the other $630Bn goes to the companies that pay matching funds) and, for Trump, this is his fairest tax cut yet, with only half the money going to corporations and rich people who don't need it - instead of the usual 90-100%.

Aside from the fact that this is yet another thinly-disguised tax break for corporations, NOT collecting $1.2Tn will push our annual deficit close to $2.5Tn – that's adding more than 10% in a single year!  This is in reaction to a virus that, so far, has infected 1,039 Americans – we could just give each person who's infected $1.2Bn – that would make them feel better!

The Bank of England did an emergency rate cut this morning and India, South Korea and Malaysia are also considering cutting rates and our own Fed has a meeting next week along with Japan, Indonesia and the Philippines followed by Thailand and New Zealand at the end of the month.  Thailand, Japan and China have already made stimulus moves and we're waiting on the ECB and Bank of Canada as well.  MORE FREE MONEY FOR EVERYONE!!!

Yet the markets are not doing better at all.  Despite yesterday's impressive "rally", we remained firmly on the sidelines as we never even came close to our "Weak Bounce" line at 2,960 and that's not even a recovery until we cross back over the "Strong Bounce" line at 3,070 and hold that for 2 consecutive days.  

Failing to get back to the weak bounce line in the amount of time it took to fall below it (2 days) means you can kiss a V-shaped recovery goodbye and failing to make a weak bounce in the time it took you to fall from the top (2 weaks) means you are just consolidating for a move down – so that's what we're paying attention to at the moment.

With all this stimulus talk being bandied about, however, I did put out an Alert to our Members this morning to be on the look out for a cross on the S&P 500 Futures (/ES) over the 2,800 line (with tight stops below) as we should get a run to at least 2,850 again as stimulus gets talked up and that's a nice $1,000 per contract if it works out but the weakness in the Futures is scary because, as I said, they already floated $1.2Tn in stimulus yet the Futures are down 2.5% this morning.

We are doing a Live Trading Webinar this afternoon at 1pm and, this evening, I'll be on Bloomberg's Money Talk at 7pm discussing the trading environment and making adjustments to our Money Talk Portfolio, which we only trade on the days of my appearances on the show so it's generally a low-touch portfolio with very conservative trades – let's see how they are holding up:

Down 8.4% is not bad in a market that is down 20% – especially as we don't have any proper hedges (we had no major gains to protect and lots of cash) but it's too early to go on a buying spree so what we are going to do is "improve" our current positions where we can.  I was on the show back on Feb 5th, while the markets were still riding high and we did add two plays but that evening I urged caution.  We should still be cautious but that doesn't mean we shouldn't take advantage of opportunities:

  • SPWR (SPWR) – A great solar player now stupidly cheap.  We sold the $8 calls for $3.10 so our net entry is $4.90 and certainly the position is not in trouble but we're going to take the opportunity to add 20 2022 $5 ($3.60)/10 ($18) bull call spreads for $1.80.  That will cost us $3,600 in cash turning this into a $10,000 spread we paid net $500 for.  Potential net gain is now $9,900 (9,900%) at $10.

  • FCX (FCX) – We just added those last month and already down a bit.  Our 2022 $10 calls are now $2.68 and the 2022 $5 calls are $4.70 so about $2 to roll $5 lower would be silly not to do if we intend on keeping the positions.  Spending $4,000 more widens the spread to $20,000 and we were in for $1,500 so now net $5,500 but the spread is $8,000 in the money – so I feel good about i as we have 2 years to recover  Let's assume we get back to $12 and net $14,000 rather than the full $20,000 for an expected gain of $8,500.

  • GOLD (GOLD) – Our Stock of the Year is holding up very well and our trade is 100% in the money so not much to do with this $12,000 spread that's currently net $3,330 other than wait to gain the next $8,670 (260%).  See, even if you missed our original net $675 entry – 260% in two years on what's left is still a nice return, right?

  • IBM (IBM) – 2019s Stock of the Year has gone on sale and you know we are going to take advantage of that.  We can roll our 2022 $120 calls at $17.70 to the 2022 $110 calls at $22 for $4.30 ($3,440) and that's certainly worth doing as now it's a $24,000 spread we paid net $2,980 for (we began with a small credit).  I'm not worried about the target so we expect to make the full $21,020 and it's now net -$5,190 (plus the roll) so FANTASTIC as a new trade too.  

  • IMAX (IMAX) – With China essentially closed and Europe closing and America just starting to panic, box office revenues are off about 50% and IMAX will have a terrible couple of quarters – but that is why they are on SALE and I LOVE them at this price.  We're going to buy back the short $20 calls for 0.60 ($1,200), not because we think they'll get to $20 but to free us up to sell other calls when they bounce and we will add 10 more $15 calls at $2.40 ($2,400) with a plan to roll down to the $10s if the roll gets cheaper than $2.40.  Adding the 10 gives us 30 long Sept $15s and let's say they just get to $18 and net us $12,000 against the current net $100 credit and the $3,600 we're spending is net $3,500 with an expected gain of $8,500 (242%), which would not be bad at all for a stock that tanked on us like this.

So, now we've spent $14,540 to improve our positions and that still leaves us with about $85,000 in cash without increasing our margin significantly so still very much in cash and margin but now we have a potentail to gain $56,590 if all goes well and we do feel good about those targets, despite the current mayhem.  

While that's an excellent gain for a $100,000 portfolio, we can also begin building a "Watch List" for stocks we'd like to buy if they get cheaper and one way we can add a little cash in the portfolio is to take advantage of the very high Volatility Index (VIX) and sell some overpriced puts while they have panic pricing:

  • Valero (VLO) – Top-notch refiner and energy is way out of favor but refiners don't make money on oil or gasoline but on the (crack) spread between the two prices and lower oil prices often means more money for the refiners, not less.  With the stock at $60, the 2022 $40 puts are $7.50, which would put you in for net $32.50 so let's sell 5 of them for $3,750 to remind us to keep an eye on the stock.  We expect to make the whole $3,750, of course.  

  • Tanger Factory Outlet (SKT) – This is an outlet mall REIT that has been destroyed but it pays a $1.43 (13%) dividend at this price ($10.40) and we can buy 1,000 shares for $10,400 and improve upon that by selling 10 2022 $10 calls for $1.80 ($1,800) and 5 2022 $10 puts for $2.85 ($1,425) so it's a net $7,175 cash outlay and, if SKT stays over $10, we get called away with a $2,825 profit plus $2,850 in dividends would be a $5,675 (79%) return in two years – that's very nice!  

  • Ford (F) is another great dividend-payer at $6, paying 0.60 (10%) so we'd love to won them but we don't have to as the 2022 $5 puts are $1, which is almost as much as the dividend but puts us into the stock for net $4 in the worst case – that's 33% off the current price.  So how much F are we willing to buy for $4?  I'd say 2,000 shares would be no problem so let's sell 20 of those puts for $2,000 and we expect to simply collect that $2,000 as well

There's a quick $11,425 added to our expected gains and only taking net $1,425 in cash to add them – that's a very fair trade-off as we still have PLENTY of firepower left to adjust with if the market makes another leg down but, hopefully, we don't all die horribly from a virus that destroys the global economy and we just make the $68,015 as planned!  

 


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  1. Good morning, All!

    It's Wednesday! Join Phil at 1pm for this week's webinar! 

    https://attendee.gotowebinar.com/register/4139125122388098317


  2. Good Morning!


  3. One step forward, 2 steps back!


  4. I still wonder how a payroll tax holiday will help people who:

    a) are in the gig economy so won't see more money right now!
    b) are getting laid off because their employer is going bust
    c) don't work, are retired or disabled

    Lots of people don't get paid if they get sick or take off from work to take care of sick children or parents. How does that help? 


  5. What kind of stimulus would actually perk up the market? Another rate cut seems like it might already be priced in (I did not do the math), and there aren't too many of those particular bullets left anyway. I think at this point it'd take an announcement that they're directly buying equities. 


  6. A rate cut would be useless now – rates are already well below the official rate anyway:

    https://markets.businessinsider.com/news/stocks/us-treasury-yield-curve-below-1-percent-red-flag-investors-2020-3-1028975968

    Yield curve


  7. If I can roll a losing short put position out 2 months to a better strike price for a small credit, is there a down side?


  8. Good morning!

    Webinar will not be too long today as I have to be over at the studio to tape the show.

    Still just under 2,800 on /ES, David Kostin on CNBC right now targeting 2,450 so that's going to make it hard to gain traction today with all the GS faithful dumping their positions for the next 10% drop.

    Big Chart – Down 10% across the board, if these lines fail we're back to the old set , which was about 10% down.  See, we never should have capitulated!  

    Payroll Tax/StJ, Ati  – How about spending $1Tn finding a cure for the virus.  Put up a $1Bn prize for a treatment and another $1Bn for a vaccine and let Capitalism do the rest.  Make testing free and available to all along with all the Purell and Clorox wipes, masks, etc. people would like to have.   Then set up a panel to mitigate damage to industries and companies on a case by case basis – not blanket bailouts shotgunned into the economy – that's why it's so fragile in the first place!  

    Good point on useless rate cuts, StJ – cost of borrowing doesn't factor in when people aren't willing to spend in the first place.  

    Rolling/Tangled – Only that you are giving the company two months to get worse but as long as you are doing it with good fundamental reasons, that's what I do all the time.

    Got my 2 long /ES and still 2 long left on /CL, now $33.50.  

    Wish I still had my /NG!

    Still have my 2 long /SI too.


  9. I don't think I've ever seen this much insider buying.  ( looking at the insider page on Finviz )


  10. Hi Phil,

    You mentioned looking at 2X ETF's for hedge protection in one of the last posts from yesterday since TOS is making the 3X's to difficult to use. Any of the 2X's look appealing to mitigate/protect part of a portfolio?

    Thx


  11. Pay roll taxes what does that help if you do not get paid? Stupid game. Good point Phil on paying to the right corse


  12. Free daycare services for all medical and healthcare workers is a good idea.  They are going to be super busy.


  13. How does that not impact the economy:

    https://www.thedailybeast.com/most-americans-will-likely-be-exposed-to-coronavirus-republicans-told

    Last week, Republican members of Congress heard a sober warning in a closed-door briefing on Capitol Hill: There’s a good chance most people in the United States will eventually be exposed to the novel coronavirus, according to one former official. 

    The assessment, from a former White House public-health official who now works in the pharmaceutical industry, did not suggest that most people will become infected or ill—rather, just that most will encounter the virus, which has killed at least two dozen Americans and infected hundreds more.

    Not all public-health experts share that view. And not everyone exposed to the virus will become infected. Still, the briefing highlighted the potential gravity of the growing crisis.

    Now, the guy works for big pharma so not totally unbiased. But still, let's keep lying about the fact that it's contained because we don't want the markets to reflect the reality!


  14. House coming out with a package and Hoyer says payroll tax a non starter…looks like theres going to be some head banging in DC. Mnuchin sees no need to for intervention in the markets. Whoa boy


  15. Phil// These watchlists, should we initiate positions on these or just wait.

    Thanks.


  16. 39 billion spending package out of UK, I would think the US needs at least 200B.


  17. Maybe this is happening without our knowing, but unclear to me why Trump is not screaming at MBS to end the oil price wars since: crushing our energy independence which he supposedly loved, hurts companies that are huge donors to RNC, helping crush the market…


  18. debt contagion could lead to muni's defaulting. Are MUB puts really this cheap right now?


  19. Insiders/Stock – That happens when there's a 20% dip.  People are generally believers in their own company and find it hard to believe it's going to drop 40%.  Also, the company of course encourages that behavior to reassure investors.  

    2x ETFs/Sun – While the 3x ETFs are fun, we can use options to leverage anything.  In the STP, we have the SQQQ Jan $25/35 bull call spreads at $2.50 so they make 300% on a 40% gain in SQQQ, which would be a 13% drop in QQQ.

    So now we look for a similar play in QQQ and it's at $197.30 and we could pick up the Jan $190 ($19.25)/175 ($13.75) bear put spreads for $5.50 and they pay $15 at $175 (10% drop) so to get $60,000 back (same as STP play) you need 40 contracts for $22,000 and then you can offset $7,000 of that with some short puts like 7 AAPL 2022 $160 puts for $10 ($7,000), which only require $5,000 in margin (but it would grow if AAPL goes down a lot).  

    That would be net $15,000 on the $60,000 spread so nice protection and you can also sell 10 QQQ April $175 puts for $5 ($5,000) to start knocking off the $15,000 cost.  I'd keep a stop on 5 of them at $7.50 and that would only cost you $1,250 and you could easily roll the rest – even in a 20% drop.

    Let's add that to the STP to compare it to our SQQQ spread.  

    Daycare/Kinki – That's a nightmare with these school closings.  Working families aren't able to deal with young kids suddenly unemployed during the week.

    Non-starter/Kustomz – A $1Tn tax break with absolutely no rationale that breaks the budget and leaves us unable to respond to further downturns better be a non-starter!  

    Watch Lists/Rookie – You can pick a few like we are for the MTP but that's because I'm on the show today and have pressure to take advantage now or possibly miss the chance.  As we're here every day, we don't have that kind of pressure so we can wait for a more verifiable bottom.

    UK/Kustomz – Thailand did $12.8Bn and their GDP is $450Bn vs UK $2.6Tn so 5x UK should be $60Bn to be proportional and US should be 10x that so $600Bn ish if we want to do as much for our people as an emerging market country is willing to do.  

    Oil/Tangled – Cheap oil is great, people can afford to drive to the doctor…

    MUB/BDC – Good call, they are probably a great short.  

    Notice it took a very long time into the 2008 crisis before MUB crashed and, even then, it recovered fast so a spread won't work but we can grab 10 of the Aug $110 puts for $1.75 and maybe we get lucky in the STP – half off at $3.50 to make it a free trade.  


  20. We are doomed!


  21. WHO just declared a pandemic.


  22. Yikes – another day another 10% down for BA.



  23. Coronavirus Is Exposing Deficiencies in U.S. Health Care



  24. Trump officials cut testimony short at coronavirus hearing



  25. Joe Biden’s victory speech on Tuesday had an audience of one


  26. We are below the lows of Monday right now! 


  27. Almost 100 points off the highs of the day on /ES and VIX is up 2… tension building…


  28. Wow, very bad day.  

    Got to leave for BNN – hopefully things don't get worse.  /NQ not holding 8,000 – yikes!


  29. F is $6


  30. holy heiniken, look at those swings on the futures right now!


  31. AVGO – Earnings tomorrow…  I'm heavily covered on this one….  we should get a good view of the 5G / IOT   and general networking industry as well as how AAPL and Samsung on managing their ramp ups     


  32. Lower lows, lower highs… Not a great trend!


  33. We are back to "sell the rips"  it seems! Had been trained for too long to buy the dips.



  34. Nasdaq is down -0.4% … over the past 4 months. LOL. What "crash"?


  35. BDC – The Dow is up 8% from December 2019! See, no crash either!



  36. Corporate debt loads a rising risk as virus hits economy




  37. U.S. sporting goods retailer Modell’s files for bankruptcy protection




  38. Why Does the Census Matter?


  39. Limit down in the am? Tom freakin Hanks and his wife are infected, what now!!!!
     


  40. Limit down within the next hour possibly… we're almost there. 30 day travel ban on Europe. It makes sense, but wow, what a disaster.


  41. We are going to need to bailout the airlines now and the tourism industry and hotels and restaurants! If I recall, the current people in charge were very much against bailing out the car industry. Capitalism and all… I am sure that they will be consistent.


  42. Entire NBA season cancelled. The bailouts will not be fair and equal, whatever they end up being. Banks first…


  43. Another 1000 down on the Dow.

    Hospitals in areas with local outbreaks seem to be getting a bit overwhelmed. 

    Testing is still an issue, better but still taking days for results. 

    We have a long way to go before this turns around. Some of the case descriptions are downright scary. 

    We are back to 1200 on /RTY…feels like a long time since I saw that last..wow. 


  44. What is absolutely amazing is that just a couple of days ago, this was described by this administration as being contained and not worse than the common cold! People will die, lives will be ruined by this lack of preparation and the continuous lies. Almost criminal.

    And now we have to ban travel to Europe! But not the UK! The health minister there just tested positive! What is the expression about horses, barns and doors?



  45. Who in their right mind would buy futures, Fed, ECB, BOJ. You'd have to be nuts! So US flight to Europe are still active?
     



  46. We were limit down on NQ for a couple minutes, sudden bounce for some reason.


  47. 12/24/18 was the low on /ES of 2316, trading now at 2613…I cant see how we dont get there in the coming days.



  48. Russell 1000 is not out of the question it seems! We lost 500 points in less than 10 days, what's another 200 points.


  49. If the NBA is canceling a season, things are much worse than they are telling us. The Tom Hanks thing is going to freak people out too.  This is what happens when you elect incompetent people – the Presidency is a life or death serious job and we elected a game show host.   


  50. And a bad game show host! Alex Trebek would be a better president!


  51. The package needs to be at least 2T to calm the markets, we have a 19T economy that will be decimated in the coming months.

    I seriously hope its just a civilization ending asteroid or a meteor and not something more serious. I get the sense that they are trying to keep people locked up in their homes and not out looting before a 3 mile wide meteor crashes somewhere into Europe.
     
    Seriously, Phil what are your thoughts, briefly if possible. Im sure you've got scenarios running around in the genius mind of yours.



  52. WTF – Trump announced that even cargo was banned from Europe and now the WH is clarifying that cargo is not included. He also said that insurers would waive co-payments and now we hear from insurance companies that it's news to them! Was he riffing on camera and making shit up? The freaking speech was vetted for crying out loud. By whom, the 19 year old intern they just hired to manage personnel? But sure, it's Biden who is senile.




  53. Tom Hanks Says He Has Coronavirus


  54. How Right-Wing Pundits Are Covering Coronavirus


  55. stj: The original plan was probably to ban cargo too, but then they saw the reaction to it and walked it back 


  56. Our hair is on fire, run like Richard Pryor!

    Yeah, the market is crashing. We might have a recession. Been there done that. And then we hit 29,000 Dow. Which was totally ridiculous anyway. NQ 7500 would put a lot of tech companies back to valuations that make more sense. This is going to flush a lot of over-leveraged and poorly run companies out. It was high time for a big injection of sanity. 

    So my plan is to stay liquid, the bottom isn't in. Look for some spots to take day-trade shots on the way down. Wait for the volatility to settle down, let a bottom start to build, and then start nibbling the cheese gently so I don't get caught in a trap. But most of all, stay calm and remember what's truly important. The market is what it is, and it's only money.


  57. Good morning!

    Can Trump and Co. really be so stupid that they thought calling it a foreign virus and closing the country was going to fix the markets or is this just another “Putin Puppet” action that further isolates and weakens the US to distance us from our allies?




  58. St. Patrick’s Day parades nixed, from New York to Dublin




  59. The Worst Outcome


  60. AP FACT CHECK: Trump misstates some of his virus actions